Appeals Court Unlikely to Overturn SEC’s Decision on GBTC’s Spot ETF Conversion, Says CoinShares Blog

The crypto community has been eagerly anticipating the outcome of the oral arguments presented by Grayscale and the Securities and Exchange Commission (SEC) in the case of the conversion of the Grayscale Bitcoin Trust (GBTC) into a spot exchange-traded fund (ETF). However, the recent reporting on the case may be overblown, according to a recent post on the CoinShares blog by Townsend Lansing, the Head of Product at the firm.

Lansing cautions readers not to forget the applicable legal standard when considering the likelihood of the Court of Appeals for the DC Circuit overturning the SEC’s decision. The court can only do so for specific reasons, including if the SEC acted in an arbitrary or capricious manner or did not follow the law.

Townsend Lansing

The court must also determine if there is a rational connection between the facts found and the decision made, or if the SEC made a clear error of judgment. Finally, the court typically shows deference to the SEC determination, even in the current environment of judicial hostility towards the regulatory state.

Grayscale’s argument is that the SEC’s decision to approve futures-based ETFs while rejecting physically-backed products was arbitrary and capricious. Grayscale also argues that the SEC’s focus on surveillance sharing agreements with significant markets violates the Exchange Act.

Lansing notes that to win on the first prong, Grayscale must show that the SEC has no reasonable basis to suggest that the regulated futures market is harder to manipulate undetected than the unregulated spot or unregulated futures market.

To win on the second prong, Grayscale must prove that the SEC’s own standards for approving ETPs referencing underlyings trading in markets it does not oversee are a violation of either the language of the Exchange Act or the authority granted to it by Congress under the Exchange Act.

Despite recent mainstream media reports suggesting that the SEC took a verbal beating at the hands of the 3-judge panel, Lansing contends that the reporting may be overblown. He notes that the court can only overturn the SEC’s decision for specific reasons and that nothing in the questioning suggested that the court found the SEC’s interpretation contrary to the language of the Exchange Act. Lansing also points out that the makeup of the three-judge panel may marginally work in favor of the SEC.

Lansing concludes that predicting judicial decisions is a fool’s errand, but based on CoinShares’ reading of the briefs and after listening to the oral arguments, the firm remains unpersuaded that GBTC now has a clearer path to becoming an ETF.

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